Sears Holdings Could Head Toward Bankruptcy, and That's OK

Chapter 11 would force the realization of the company's liquidation value, and prove why a Sears turnaround, though valuable if it were to happen, isn't necessary to make money on the stock.

Jun 8, 2014 at 10:00AM

Much has been said regarding the ultimate future of Sears Holdings (NASDAQ:SHLD)-- whether its retail operations can stabilize, the supposed value of its real estate holdings, and lately, the likelihood of bankruptcy. That last one, the b-word, scares most investors, and not without reason. In some cases, equity holders can get wiped out during bankruptcy proceedings, as debt holders are first in line for liquidation proceeds. But what so many continue to undervalue, and in some cases ignore, is the incredibly rich asset base. While entering bankruptcy would likely mark the end of a 121-year-old retailer, it could showcase what Sears really is -- a real estate and brands business worth a multiple of its market value today.

What it would look like
As Sears' earnings continue to cascade and the company sheds assets to raise additional cash, many analysts and investors (including plenty here at the Fool) are rightfully calling the demise of existing operations. Even though CEO and Chairman Eddie Lampert continues to express optimism about the retail business -- pushing stories about the growing online presence and Shop Your Way loyalty program -- the masses are likely correct in forecasting an eventual end to a longtime mall staple.

But after the Sears sign comes down, the company will still own the property and its names. As has been reported by bulls for years now, the property is worth a ton of money, and arguably much more than Sears' market value today. Sears owns in the neighborhood of 2% of U.S. retail space. Sure, much of that space is in undesirable locations, but a good chunk of it (north of 20%) is highly valuable "A" retail space.

So, in the event of bankruptcy, the interested parties may call for the liquidation of the retail business. Lampert has steadfastly championed the idea of a turnaround, but has mentioned multiple times that he would monetize assets if the situation called for it. As corporate bankruptcies are far more forgiving than personal ones, Sears Holdings could unload some of the more unfavorable debt (retail agreements, etc.) and reorganize the capital structure of the business. With many of its cash-generating assets already out the door, the remaining business could easily transition to a REIT (in addition to the remaining brands). Investors also need to keep in mind that much of the real estate is unencumbered, meaning that the company's debt load is backed not by these assets, but elsewhere. To say that Sears Holdings (note, not Sears the department store) has a liquidity crisis is a mislabeling. Equity investors are not nearly as threatened in a bankruptcy situation as many purport.

Exclusively smart money
In regard to Wall Street as a whole, this is certainly a contrarian opinion. But looking at Sears' major holders in proportion to its outstanding shares paints a rare picture -- more than 95% of the business is owned by some of the smartest investors out there, including Bruce Berkowitz's Fairholme Capital (a near 25% owner), Horizon Kinetics (a renowned value shop whose core fund has averaged a more than 11% annual return since 1996), and, of course, Lampert's own hedge fund, ESL Investments, which, in addition to his personal holdings, owns nearly half of the business.

Bears would say that this collection of billionaires holds on to Sears largely as a point of pride at this point, but that would be extremely out of character for every single one of them.

Wise investors will not try to determine the likelihood of a turnaround, but recognize the liquidation value of the business in comparison to its market value. In many cases, a liquidation figure is irrelevant unless the business is broken up, but that is a distinct possibility here, and therefore the low-end scenario should indeed be break-up value. Few are hoping for miracles with Sears, but even fewer understand that the company doesn't need one.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

Michael Lewis owns shares of Sears Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers